The National Company Law Tribunal (NCLT), Chennai, on 7 October held that an unpaid equity contribution does not qualify as operational debt under the Insolvency and Bankruptcy Code (IBC), 2016, and cannot form the basis of a petition under Section 9 of the Code.
A Bench of Judicial Member Sanjiv Jain and Technical Member Venkataraman Subramaniam dismissed a Section 9 petition filed by ISPT LLC against Indo Shell Mould Limited, holding that the amount claimed was an investment and that the correspondence between the parties also disclosed pre-existing disputes. The Tribunal observed:
“The said amount is an investment and does not qualify the definition of 'operational debt' as defined under section 5(21) of IBC which provides that 'operational debt' means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force…”
ISPT LLC operated a tool and die machining business in the United States. Ramki Ramakrishnan held 51% of the business, while Indo Shell Mould Limited held the remaining 49%.
In 2012, both shareholders entered into a Letter of Undertaking under which Indo Shell agreed to contribute USD 2 million towards the business in monthly instalments of USD 50,000 over 40 months. However, Indo Shell contributed only USD 1.11 million, leaving an outstanding contribution of USD 890,000.
Subsequently, ISPT LLC filed a petition under Section 9 of the IBC, seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against Indo Shell to recover the outstanding amount.
The Tribunal referred to the Supreme Court's decision in EPC Construction India Ltd. v. Matrix Fertiliser and Chemicals Ltd., (2025) ibclaw.in 443 SC, which held that Cumulative Redeemable Preference Shares (CRPS) form part of share capital and do not constitute debt. The Supreme Court had clarified that such shares do not create a creditor-debtor relationship and that non-redemption does not convert preference shareholders into creditors.
The Bench also noted that it had earlier dismissed petition IBA/820/2020, filed by the Respondent, through an order dated 31 March 2022, after finding that a dispute existed between the parties. The parties subsequently entered into a settlement through a Memorandum of Understanding (MOU) dated 25 August 2023 to resolve their disputes.
Under the MOU, the first party (Respondent) was entitled to revive or initiate fresh proceedings, including the suit before the Commercial Court, in the event of default. The MOU further stipulated that the entire suit claim would be treated as undisputed operational debt due from ISPT. Although ISPT initially paid Rs. 25 lakh under the MOU, it failed to make further payments. The Respondent consequently filed petition CP/173/2024 against ISPT, pursuant to which CIRP was initiated.
The Tribunal also considered the Respondent's contention that ISPT and its Indian subsidiary owed substantial amounts for supplies. However, it noted that the National Company Law Appellate Tribunal (NCLAT), in its order dated 20 November 2024, had clarified that the MOU did not bind ISPT LLC, as it was neither a party to nor a signatory of the compromise.
Relying on the Supreme Court's decision in GLS Film Industries Pvt. Ltd. v. Chemical Suppliers India Pvt. Ltd., 2026 SCC OnLine SC 551, which referred to Mobilox Innovations Private Limited v. Kirusa Software Private Limited, (2018) 1 SCC 353, the Bench examined the correspondence exchanged before issuance of the demand notice. It found that the correspondence established the existence of pre-existing disputes that were neither illusory nor sham.
Further, the Tribunal held that the outstanding contribution was an investment and did not qualify as operational debt under Section 5(21) of the IBC. It added that even if the amount were assumed to constitute operational debt, the existence of pre-existing disputes would independently bar admission of the Section 9 petition.
Accordingly, the NCLT dismissed the petition.
For Respondent: Mr. Manoj Gopalakrishnan